RECESSIONS AND GOLD

Why is this the case? Because the recession is real. If the rest of the world moves into recession, as I think is likely, the demand for commodities will fall. The value of commodities has nothing to do with value in themselves. They are valuable only because the consumer goods that commodities are used to produce are expected to rise in price.

Manufacturers believe that there will be increasing future demand by consumers for these goods. Therefore, they enter the market for raw commodities, land, and labor, and they bid against each other in an attempt to secure ownership of these producer goods.

Some people speak of the intrinsic value of gold. Whenever you hear anyone say this, you can know for sure that you are dealing with someone who knows nothing about economic theory. There is no such thing as intrinsic value. There is only imputed value. There can be historic value, but this historic value is based on long periods of time in which people have imputed value to a particular good or service. There is no intrinsic value, meaning a fixed market price, for any commodity.

Commodities are valuable only in so far as the output of commodities is valuable. This was a fundamental insight of the founder of Austrian School economics, Carl Menger.

In a recession, consumer demand falls. The goods and services that had been demanded before are perceived as too expensive by consumers now facing a recession. They reallocate their money to the most important uses in their household budgets. They buy the most important goods and services, and they skip the purchase of marginal goods and services. So, the tools of production that are used to produce the marginal goods suffer a price decline. Demand for these producer goods falls.

Manufacturers look to the future, and they conclude that consumers will be buying far fewer of the items produced by the particular producer goods. Producers also look at the price of commodities that are used to produce these goods, and they decide to purchase fewer of these commodities. So, the price of commodities falls.

Gold and silver have been sold as hedges against price inflation, and sellers also have told customers that the Federal Reserve is dramatically increasing the money supply. For almost two years, I have said that the Federal Reserve is not dramatically increasing the money supply. It is barely increasing the money supply at all. This is why I predicted there would be a recession. This is why I predicted that consumer prices would not rise at anything like the increase in the supply of M3 and MZM.

I looked at the adjusted monetary base, and I concluded that the Federal Reserve was only increasing the monetary base by about 2% per annum. I looked at M1, and I concluded that the money supply was barely climbing at all. This led me to predict that consumer prices would slow down, and that commodity prices would fall as a result of a shift in consumer spending.

I post links to these statistics on my site’s page, Federal Reserve Charts.

http://www.garynorth.com/public/department29.cfm

This is why, on March 18, I decided that the bull run in gold and silver had ended. Only war with Iran was likely to push gold back above $1,000 per ounce in 2008. I am not optimistic that gold would go above $1000 in 2009, because I expect the real estate market will continue its downward fall, and I think that will continue at least in the 2010, and it may continue into 2011. Therefore, I think this recession will be much longer than the average recession after World War II of 11 months. Gold does not do well in most recessions. Furthermore, neither does silver.

I realize that you have read a lot of reports from a lot of people that gold and silver were inevitably heading higher. Well, they are not inevitably heading higher.

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